Long-term housing market lessons from COVID-19’s short-term impact

The U.S. housing market has been strong for some time, with home value prices up 3.9% in the last year. But COVID-19 may be stalling the real estate industry and unearthing some challenges that were glossed over during the years of economic growth. Unfortunately, it’s looking like things are going to get worse before they get better.

Here are some of the current issues consumers and landlords are facing as the economy struggles with the ongoing uncertainty from the pandemic.

The Part-Time Landlord

The current widespread unemployment is historical. CNN reported that 6.6 million Americans filed for unemployment the week ending on March 28, a 3,000% jump since early March. As they wait for their benefits to tide them over during the stay-at-home mandate, many question if and how they will pay their rent.  According to the New York Times, 40% of New York tenants may not pay their rent in April.

Property owners are facing extraordinary pressure as a large portion of tenants may not pay their rent this month or next due to the widespread level of unemployment. While the perception is that a corporate entity with deep pockets may own the property the tenant is not paying rent on, it’s likely wrong.

The majority of landlords own only one to four properties. They likely have a mortgage to pay and hope to retire from the income from their rental property investment one day, leading them to question if the dream of passive income from working as a part-time landlord is worth the risk.

The Potential Credit Crisis

The COVID-19 pandemic may have repercussions that could affect consumers for months or years to come. As unemployment rises dramatically, lenders are tightening up their loan requirements for loan and credit products across the board, making it harder for consumers to qualify for credit cards, loans and mortgages when they may need them most.

Current rates haven’t been this low since 2016 — according to Freddie Mac, the current interest rate for a 30-year fixed-rate mortgage is 3.45%. But consumers who were hoping to buy a home or refinance to benefit from more affordable monthly payments may not qualify at this time as lenders seek to eliminate any higher-risk buyers who may not be able to meet their loan responsibilities in the future. Buying real estate using cryptocurrency may be an alternative to traditional credit, but the concept may be hard to grasp for many real estate investors.

Hotels, Bed and Breakfasts, and Vacation Rentals

The hardest-hit properties are short-term rentals, hotels, and vacation rentals. With a global lockdown in place, tourism (and fully booked rentals) have come to a halt. The last thing most consumers may be thinking of spending on during these uncertain times is a vacation.

The drop in short-term rental interest has left many Airbnb hosts looking for alternatives to fill their rentals and pay the bills. Many are advertising their properties on residential real estate rental websites, hoping to lock in a tenant for the long term. The strategy is smart, but it may potentially take hundreds or thousands of vacation rentals off the market. Once things return to normal, the tourism industry may suffer from the lack of vacation rentals at some of the largest tourist destinations.

Buying High, Selling Low

The COVID-19 pandemic is leading the world down an uncharted road. The current real estate challenges are likely to impact the housing market negatively over the long term. Part-time landlords may choose to get out while they can by selling their income properties, but when is the right time?

With high unemployment and tighter credit conditions, the right time may not come around for quite a while. Buyers who can’t qualify for a mortgage may be unemployed for some time, or unable to save a sizable down payment, may be unable to buy a home for years. Real estate values are likely to drop, since demand is lower, leaving many sellers at risk of giving up their properties at a loss.

The best hope for current home and property owners is that the COVID-19 health crisis is resolved sooner than later and Americans can get back to work so they can pay their rent and property owners can keep their properties.

What Lies Ahead?

The current COVID-19 crisis may be short term, but its effects may linger over the long term. It’s too soon to tell where the real estate market is headed, but the general thinking is that once the virus is contained and people can leave their homes and get back to work (and spend), the economy will pick up close to where it left off.

It may be an optimistic point of view, but the government and corporate efforts to freeze or delay loan payments and other bills so consumers can get back on their feet, plus the CARE Act stimulus, may keep major economic issues at bay. If the efforts are successful, getting back to business may not be the cold start of past recessions or economic crises. Hopefully, the pandemic can be looked back at as a time when the world learned from past lessons and applied what they learned successfully.

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